We have tested the effect of in vitro cytosine methylation on the transforming activity of Moloney sarcoma virus (MSV). It was found that methylation of the MSV genome at HpaII or HhaI sites significantly reduced its ability to transform NIH3T3 cells in DNA transfection experiments. This reduction in transforming activity was reversed by the use of 5-Azacytidine, a specific inhibitor of methylation. A low level of transforming activity observed with methylated MSV DNA was apparently associated with the loss of methyl groups from MSV DNA during initial rounds of DNA replication in cells. Methylation of a certain region of the MSV LTR, i.e., the region at or slightly downstream from the start of transcription, and the mos gene (i.e. the 5 feet end) both inhibit transformation. Non-transformed cells which contained methylated copies of MSV DNA were isolated by a contransfection technique. The methylated MSV DNA in these cells was shown to be highly insensitive to DNase I digestion in contrast to non-methylated, actively expressed MSV genomes. After extensive exposure of the cells containing methylated MSV DNA to 5-Azacytidine, transformed cells were isolated which had lost methylation at a number of HpaII sites in the MSV DNA.